HomeFinanceWhat advantages does the South African financial market offer new traders?

What advantages does the South African financial market offer new traders?

A quick glance at the figures proves that the South African government has performed relatively well in combating the impact of Covid-19, recording 10,652 cases and a relatively paltry 206 deaths as of May 12th.

Like most emerging economies, however, effectively safeguarding citizens from the effects of the pandemic has required a significant economic trade-off, with a host of businesses (including property giant Pam Golding) taking the decision to slash basic salaries and suspend all pension fund contributions other than risk premiums.

However, it can be argued that the economy may be well-placed to recover quickly in the near-term, while the South African Rand (ZAR) could also offer opportunities to investors in the future. Here’s why.

A Look at South Africa’s Currency – Then and Now

Historically, the rand has served as something as an outlier in the world’s financial markets, while it was tipped as a viable buy at the so-called “Bank of America Merrill Lynch” as recently as Q4 2019.

It has performed particularly well during times when investor risk appetites have faltered, and this was definitely the case last year as the geopolitical tensions between the U.S. and China reached fever pitch.

The reason for this is simple; as forex markets such as ZAR tend to benefit directly from equality inflows that occur in instances were equities are the asset class most likely to thrive as a result of specific market developments.

Of course, the historical appeal of the ZAR has meant little of late, with the currency enduring a harrowing start to 2020 and Tickmill reporting that the currency slumped to a record-low against the U.S. Dollar (USD) as recently as April.

There are several factors behind this slump (aside from Covid-19); including soaring government debt, a number of credit-rating downgrades and the expulsion from a major bond index tracked by billions dollar of funds.

The good news here is that the ZAR has undoubtedly reached rock-bottom and is unlikely to fall any further in the near-term, while the fact that these bad news items are already priced-in could leave the currency poised for a rebound as South Africa and similar emerging markets embark on a period of recovery.

The Long-term Outlook for the Rand

This relatively positive sentiment is indicative of the wider economic climate in South Africa, as the new President Cyril Ramaphosa takes practical steps to reverse the impact of years of shrill populism and economic incompetence.

This represents a long-haul journey, however, and one that has seen South Africa slip into two recession since the new leader took office in February 2018.

However, the groundwork is being laid for a brighter and more sustainable outlook, and one that will boost South Africa’s economic performance and attract significant investment from overseas. This is particularly true in the event of South African stocks and currencies being undervalued, which is likely during periods of economic decline and austerity.

This will, of course, have a positive impact on the value and demand for the ZAR, while South Africa’s increasingly progressive approach to regulating cryptocurrency trading could also stand the market in good stead in the future and create new opportunities for traders going forward.